Pakistan's new govt may have to roll back fuel, power subsidies

April 14, 2022: Pakistan's new government led by Prime Minister Shehbaz Sharif is in internal discussions on whether to roll back fuel and power subsidies that have blown a hole in public finances amid a stuttering economy, officials said.

Former premier Imran Khan who was ousted in a confidence vote this week announced a cut in petrol and electricity prices in February despite soaring global prices in a bid to win back popular support.

But that relief measure, estimated at 373 billion Pakistani rupees ($2.06 billion), has stretched government finances in a way that cannot be sustained, the finance ministry's top bureaucrat said. It has also endangered an ongoing International Monetary Fund rescue programme.

"The relief package will add to a fiscal deficit which we cannot afford at the moment," Finance Secretary Hamed Yaqoob Sheikh told Reuters.

"Either it has to be rolled back or compensating reductions in other expenditures would be required to ensure that the primary balance agreed with the IMF is achieved," he said.

The primary budget balance excludes debt repayment obligations.

The fiscal deficit could go as high as 10% of gross domestic product, according to Sharif's top economic adviser Miftah Ismail, widely expected to be named finance minister.

Sharif met his economic team on Thursday to tackle the subsidies.

"We have been discussing this before (with the previous government) and are discussing it again with the new government as well," a finance ministry official told Reuters, speaking on the condition of anonymity.

The officials are proposing spreading the subsidies' roll-back over two to three months to soften its impact, he said, adding that the decision was now with the new political leadership.

IMF BAILOUT

Pakistan is in the midst of a $6 billion IMF bailout programme and is yet to clear its seventh review that would release over $900 million and unlock other funding that depends on the fund's clearance.

The seventh review started in early March, but no agreement had been reached before the collapse of Khan's government.

"Following the no-confidence motion, the IMF stands ready to engage with the Pakistan government and enquire about its policy plans," IMF's Resident Representative Esther Perez Ruiz told Reuters.

Pakistan has enough reserves to finance 45 to 50 days' worth of imports, Ismail said. Foreign exchange reserves held by the central bank fell to $11.3 billion from $16.2 billion in the matter of a month, according to figures released last week.

A reversal of the fuel subsidies will be politically sensitive for the new government trying to shore up popular support at a time when inflation is running at 12.7%.

"Either the new government can raise prices which will be politically costly, or they could cover the deficit by reducing other non-development expenditures which will prove politically difficult," said Kaiser Bengali, a Pakistani economist who has previously held a number of government advisory roles.

($1 = 181.0000 Pakistani rupees)

Reuters